Bloomberg Professional Services
The increased use of electronic trading has shaped how different markets and asset classes operate. It is now possible to run sophisticated algorithmic strategies, find liquidity in niche asset classes, and improve costs and transparency for various markets. And that’s just the tip of the iceberg.
Lets look at some of these recent developments and how upcoming regulatory changes may usher in the next wave of electronic trading.
Evolution of electronic trading
Many of these advances in electronic trading were front and center at this year’s Sell-Side Leaders Forum hosted by Bloomberg in New York.
“It’s a very different world today,” Lisa Bravo, Global Head of Sell-Side OMS at Bloomberg, told an audience that included traders, analysts, and business heads as she recalled the manual processes that once dominated trading floors.
Workflows have shifted from writing paper tickets, and firing off faxes to getting things done using digitized systems. For example, traders can now stream Request for Quotes (RFQs) over electronic platforms or algorithmically execute a strategy to minimize market impact.
These are just a few of the benefits borne out of electronic trading, which has also laid the groundwork for automated pricing engines, real-time price streaming, and electronic order placements (among others).
Streaming markets and workflow automation
During the recent Sell Side Leaders forum in New York, Larry Tabb, Head of Market Structure Research at Bloomberg, Amy Hong, Head of Market Structure & Strategic Partnerships, Global Banking and Markets at Goldman Sachs, Sonali Theisen, Global Head of FICC Electronic Trading & Markets Strategic Investments at Bank of America, and Eddie Wen, Global Head of Digital Markets at J.P. Morgan, reflected on electronic trading shifts and benefits they’ve witnessed over the years.
The consensus was that the electronification of markets has led to the development of streaming markets and automated order-driven systems. This evolution also enabled sophisticated algorithmic execution tools designed to achieve various strategic objectives in widely traded markets like equities and fixed income to more niche asset classes. The increased liquidity realized from electronic trading is a direct reason for these benefits.
“You have liquidity providers who can systematically generate prices and provide liquidity,” according to Amy Hong. “That has enabled greater data, meaning clients who are liquidity takers can now automate their workflows.”
Additionally, electronification has provided more transparency into bid-offer spreads. For instance, in the non-deliverable forwards (NDFs) market, there was no two-way flow.
However, when the NDF market became electronified, traders saw the same efficiencies they’ve come to enjoy in other established markets like traditional foreign exchanges. Costs were lower, transparency was higher, and now they were able to wire many clients on various platforms. All that led to the product becoming more liquid.
The future of electronic trading
Though there has been a significant increase in electronic trading, there is still a way to go. The infrastructure has clearly matured, but electronic trading still needs to establish a similar foothold in other asset classes, where innovation remains necessary.
What’s more, the transition to a T+1 settlement cycle was a big undertaking. Reducing settlement times by 70-80% requires comprehensive coordination across all market participants. While industry bodies like the DTCC and Structured Finance Association have played crucial roles in managing this transition, the complexity of aligning global markets with the T+1 cycle introduces potential mismatches in funding and foreign exchange (FX) transactions. This necessitates ongoing collaboration with clients to manage potential discrepancies effectively.
There’s also the technological and regulatory pressures that accompany these changes. The rise of high-frequency trading and portfolio-based trading has significantly increased the volume and complexity of trades, necessitating robust technological infrastructures capable of handling thousands of transactions instantaneously.
Additionally, upcoming regulations, such as potential one-minute TRACE reporting, may pose further stress on existing systems. And while this may be a challenge, it can also be an opportunity.
“Bloomberg was there when TRACE was first introduced in the early 2000s, and we’ll absolutely be there to be able to meet this challenge as well,” Lisa Bravo said. “We’ve already been investing in improving the speed of our architecture and reimagining how we deliver the data.”
It’s just the start of the new phase in electronic trading, and if it’s anything like the previous ones, expect more efficiency, transparency, and liquidity.